September 24, 2022

ECB May Use CBDC To Minimize Bigtech’s Market Dominance

The market dominance enjoyed by big tech companies is a major problem for the European Central Bank (ECB) and it is thinking about leveraging central bank digital currencies (CBDC) to fix this issue.

A discussion paper will be unveiled by the monetary authority that would help in ensuring a smooth and continued operation of the existing monetary system.

Big tech companies have been able to maintain control of the payments markets because of the ‘network externalities’ associated with the use of fiat as a means of exchange.

Now, the ECB is coming up with ways through which it can use a CBDC to breach this dominance and make it an even playground for everyone.

The paper

The discussion paper that the ECB unveiled began by highlighting the increasing amount of interest that has been generated by the idea of central bank digital currencies (CBDCs).

These digital currencies have also received interest from global central banks and CBDCs have already been launched in two countries, the Bahamas (Sand Dollar) and Nigeria (eNaira).

The report is a detailed one that explains the potential of these CBDCs and the level of growth to expect, along with several use cases in the economy, which is being digitized rapidly.

In addition, it is because of CBDCs and the interest they have generated that many digital platforms are dominating the market and have also pushed more companies to increase their data and software requirements.

It has also helped in creating an anti-competitive environment, which has seen the digital market power shift towards the tech giants.

Digital currency users

Most people decide to switch to these digital platforms, simply because it has become a trend, which is what network externalities imply.

This is usually how the winner-takes-it-all methodology comes into play in the industry. However, the report said that this situation is not good for the digital industry.

The ECB is also concerned that platforms that have become dominant and also issue digital currencies, like the Diem, could become issuers of private money via these network externalities.

This would mean that a domestic economy’s monetary sovereignty would be at risk. The use of fiat currency would be at risk if it starts acting as a medium of exchange, a unit of account, or store of value.

But, the European Central Bank (ECB) believes that issuing a central bank digital currency (CBDC) can help in avoiding such a scenario.

CBDC

This is because a CBDC can be used for ensuring that public money continues to be used practically in the economy.

In addition, it can also be used for resolving issues in financial intermediation and can also bring down the cost associated with payments.

These are some of the reasons that other countries are also taking an interest in central bank digital currencies (CBDCs).

Many countries, such as India and Russia, have already begun the development of their digital currencies and China has already conducted several pilot programs to test its own digital yuan.

Leave a Reply

Your email address will not be published.